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A U D I T E D C O N S O L I D A T E D F I N A N C I A L

S T A T E M E N T S A N D O T H E R F I N A N C I A L

I N F O R M A T I O N

Cedars-Sinai Medical Center Years Ended June 30, 2011 and 2010 With Report of Independent Auditors

Ernst & Young LLP

1107-1272406

Cedars-Sinai Medical Center

Audited Consolidated Financial Statements and Other Financial Information

Years Ended June 30, 2011 and 2010

Contents

Report of Independent Auditors.......................................................................................................1

Audited Consolidated Financial Statements

Consolidated Balance Sheets ...........................................................................................................2 Consolidated Statements of Activities .............................................................................................4 Consolidated Statements of Cash Flows ..........................................................................................6 Notes to Consolidated Financial Statements ....................................................................................7

Other Financial Information

Report of Independent Auditors on Other Financial Information .................................................42 Consolidating Balance Sheets ........................................................................................................43 Consolidating Statements of Activities ..........................................................................................47

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Report of Independent Auditors

Board of Directors Cedars-Sinai Medical Center

We have audited the accompanying consolidated balance sheets of Cedars-Sinai Medical Center (the Medical Center) as of June 30, 2011 and 2010, and the related consolidated statements of activities, and cash flows for the years then ended. These financial statements are the responsibility of the Medical Center’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Medical Center’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Medical Center’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cedars-Sinai Medical Center at June 30, 2011 and 2010, and the consolidated changes in its net assets and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

ey October 19, 2011

A member firm of Ernst & Young Global Limited

Ernst & Young LLP Suite 500 725 South Figueroa Street Los Angeles, CA 90017-5418 Tel: +1 213 977 3200 Fax: +1 213 977 3729 www.ey.com

2011 2010AssetsCurrent assets:

Cash and cash equivalents 227,685$ 314,930$ Investments 557,311 296,379 Board designated assets 425,803 342,074 Current portion of assets limited as to use 12,010 11,512 Patient accounts receivable, less allowance for uncollectible

accounts of $172,874 in 2011 and $169,697 in 2010 393,347 383,731 Inventory 21,484 17,290 Prepaid expenses and other assets 76,164 43,472

Total current assets 1,713,804 1,409,388

Assets limited as to use, less current portion 94,416 284,452 Property and equipment, net 1,379,193 1,166,832 Investments 164,619 156,691 Assets restricted for the acquisition of property and equipment 4,824 4,444 Pledges receivable 53,960 55,741 Permanently restricted assets 223,048 215,829 Other assets 91,835 88,347

Total assets 3,725,699$ 3,381,724$


Consolidated Balance Sheets(Dollar amounts expressed in thousands)

June 30

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2011 2010Liabilities and net assetsCurrent liabilities:

Accounts payable and other accrued liabilities 206,425$ 141,965$ Due to third-party payers 3,847 10,271 Accrued payroll and related liabilities 202,048 184,944 Current maturities of long-term debt 34,455 32,975

Total current liabilities 446,775 370,155

Long-term debt, less current maturities 1,168,483 1,204,136 Accrued workers’ compensation and malpractice

insurance claims, less current portion 68,027 61,809 Other liabilities 45,641 49,059

Commitments and contingencies

Net assets:Unrestricted 1,541,132 1,258,005 Temporarily restricted 232,593 222,731 Permanently restricted 223,048 215,829

Total net assets 1,996,773 1,696,565 Total liabilities and net assets 3,725,699$ 3,381,724$

See accompanying notes.

June 30

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2011 2010

Unrestricted net assets activityUnrestricted revenues, gains and other support:

Net patient service revenues 2,441,762$ 2,117,193$ Premium revenues 56,622 58,108 Other operating revenues 111,049 105,401 Investment income associated with operations 3,816 87 Net assets released from restrictions 114,943 107,859

Total unrestricted revenues, gains and other support 2,728,192 2,388,648

Expenses:Salaries and related costs 1,247,996 1,139,446 Professional fees 87,147 82,495 Materials, supplies and other 825,118 708,376 Interest 48,835 46,694 Depreciation and amortization 111,036 97,695 Provision for uncollectible accounts 224,573 176,222

Total expenses 2,544,705 2,250,928 Operating income 183,487 137,720 Investment income associated with future

operating and capital needs 88,505 52,475 Excess of revenues over expenses 271,992 190,195 Net assets released from restrictions used for the

purchase of property and equipment 787 1,194 Changes in of prior service costs and unrecognized losses 10,348 (34,275) Other – 1,470 Increase in unrestricted net assets 283,127$ 158,584$



Consolidated Statements of Activities(Dollar amounts expressed in thousands)

Year Ended June 30

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Consolidated Statements of Activities (continued)

2011 2010

Increase in unrestricted net assets 283,127$ 158,584$

Temporarily restricted net assets activityContributions and grants 115,811 101,046 Investment income 9,781 8,790 Net assets released from restrictions (115,730) (109,053) Increase in temporarily restricted net assets 9,862 783

Permanently restricted net assets activityContributions 7,162 20,033 Investment income added to corpus 57 54 Increase in permanently restricted net assets 7,219 20,087 Increase in net assets 300,208 179,454 Net assets at beginning of year 1,696,565 1,517,111 Net assets at end of year 1,996,773$ 1,696,565$


Year Ended June 30


(Dollar amounts expressed in thousands)

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Statements of Cash Flows

2011 2010Operating activitiesIncrease in net assets 300,208$ 179,454$ Adjustments to reconcile increase in net assets to

net cash provided by operating activities:Depreciation and amortization 111,036 97,695 Provision for uncollectible accounts 224,573 176,222 Unrealized gains on investments (73,682) (55,801) Changes in operating assets and liabilities:

Patient accounts receivable (234,189) (144,463) Inventory, prepaid expenses and other current assets (36,886) 4,177 Accounts payable and other accrued liabilities 38,571 (29,565) Due to third-party payers (6,424) (1,872) Accrued payroll and related liabilities 17,104 21,245

Net cash provided by operating activities before net purchasesof trading investments 340,311 247,092

Net purchases of trading investments (74,894) (188,551) Net cash provided by operating activities 265,417 58,541

Investing activitiesExpenditures for property and equipment (298,652) (219,982) Acquisition of management company – (80,063) Increase in other assets (4,356) (2,546) Decrease in pledges receivable 1,781 8,876 Net purchases of alternative investments (14,475) (89,809) Increase in assets restricted for the acquisition

of property and equipment (380) (312) Increase in permanently restricted assets (7,219) (20,087) Net cash used in investing activities (323,301) (403,923)

Financing activitiesProceeds from issuance of long-term debt – 541,045 Cost of issue paid – (5,473) Principal payments on long-term debt (32,975) (13,740) Increase in other long-term liabilities 3,614 10,955 Net cash (used in) provided by financing activities (29,361) 532,787 (Decrease) increase in cash and cash equivalents (87,245) 187,405 Cash and cash equivalents – beginning of year 314,930 127,525 Cash and cash equivalents – end of year 227,685$ 314,930$

Supplemental cash flow information:Interest paid 59,882$ 43,409$


(Dollar amounts expressed in thousands)

Year Ended June 30

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Notes to Consolidated Financial Statements (Dollar Amounts Expressed in Thousands)

June 30, 2011

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1. Summary of Significant Accounting Policies

Organization

Cedars-Sinai Medical Center, a California nonprofit public benefit corporation (the Medical Center), is tax-exempt under the provisions of the Internal Revenue Code and applicable provisions of the Franchise Tax Code of the state of California. The accounts of the Medical Center include the following significant affiliate/subsidiary organizations:

The Medical Center is the sole corporate member of Cedars-Sinai Medical Care Foundation, a California nonprofit public benefit corporation (Foundation). The Foundation is tax exempt under the provisions of the Internal Revenue Code and applicable provisions of the Franchise Tax Code of the state of California and operates and maintains multispecialty clinics.

Greater Valley Management Services Organization Inc. (Greater Valley MSO) is a wholly owned for-profit subsidiary, which provided comprehensive medical management services to medical and physician practice groups under management services agreements. These agreements were terminated during 2001, and currently Greater Valley MSO does not conduct any business activities, although it continues to be obligated under an office space lease until May 2012.

On December 1, 2009, the Medical Center became the sole corporate member of the California Heart Center Foundation and Gift of the Heart Foundation (collectively Heart Foundation). The Heart Foundation entities are California nonprofit public benefit corporations and both are tax exempt under the provisions of the Internal Revenue Code and applicable provisions of the Franchise Tax code of the State of California. The Heart Foundation raises funds for the support of heart related activities. The fair value of the Heart Foundation’s net assets totaled $1,470 on December 1, 2009, which has been reported as an increase in unrestricted net assets. In July 2010, the Gift of the Heart Foundation merged into the California Heart Center Foundation.

The consolidated financial statements include the accounts of the Medical Center, the Foundation, Greater Valley MSO, and Heart Foundation. All significant intercompany transactions and balances have been eliminated in consolidation.


Notes to Consolidated Financial Statements (continued) (Dollar Amounts Expressed in Thousands)

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1. Summary of Significant Accounting Policies (continued)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Net Patient Service Revenues

The Medical Center and the Foundation have agreements with third-party payers that provide for payments to the Medical Center and Foundation at amounts different from established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenues are reported at the estimated net realizable amounts from patients, third-party payers, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payers.

The Medical Center and Foundation are reimbursed for services provided to patients under certain programs administered by governmental agencies. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. The Medical Center and Foundation believe that they are in compliance with all applicable laws and regulations and are not aware of any pending or threatened investigations involving allegations of potential wrongdoing.

The administrative procedures related to the cost reimbursement programs in effect generally preclude final determination of amounts due until cost reports are audited or otherwise reviewed and settled upon with the applicable administrative agencies. Estimation differences between final settlements and amounts accrued in previous years are reported as adjustments of the current year’s net patient service revenue. In the opinion of management, adequate provision has been made for adjustments, if any, that might result from subsequent review.



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During 2011 and 2010, the Medical Center received information requiring changes in its estimates of the settlements due for certain open cost report years. Based on this information, adjustments to the open cost report years increased net patient service revenues and operating income by $8,500 and $14,991 for the years ended June 30, 2011 and 2010, respectively.

Medi-Cal Fee Program

As part of the American Recovery and Reinvestment Act economic stimulus package passed in 2009, Congress temporarily increased the Federal Medical Assistance Percentage (FMAP) for all states, allowing states to draw down increased federal dollars for hospitals that provide medical care for Medicaid patients. California hospitals organized to pursue this stimulus funding through the California Hospital Fee Program to mitigate annual losses of $4.6 billion (unaudited) statewide. Passed into law by the California State government and approved by CMS in fiscal 2011, the California Hospital Fee Program provided enhanced revenues related to provision of services to Medicaid patients, offset to a degree by the requirement to pay a fee (known as the Quality Assurance (QA) Fee) based on established rates applied to each hospital’s historical patient days. This QA fee in aggregate for the state served as the amount that was put up to draw on amounts from the FMAP program, resulting in California hospitals netting an additional $2.65 billion (unaudited) in revenues. The distribution of this additional net amount, thus, took the form of two components for the Medical Center; an expense related to the QA fee and enhanced revenues related to Medi-Cal business. Total QA Fees (recorded as Materials, supplies and other) incurred by the Medical Center during fiscal 2011 were $73,366, while revenue from the program (recorded as Net patient service revenues) totaled $87,796.

Premium Revenues and Related Costs

The Foundation has agreements with various health maintenance organizations (HMOs) to provide medical services to subscribing participants. Under these agreements, the Foundation receives monthly capitation payments based on the number of each HMO’s participants, regardless of services actually performed by the Foundation. Such payments are recorded as premium revenues.



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The costs of health services provided by other health care providers to the participants, including administrative costs and out-of-area or emergency services, are included in professional fees, and totaled approximately $25,038 and $26,160 for the years ended June 30, 2011 and 2010, respectively. Such costs are accrued in the period in which the services are provided based in part on estimates, including an accrual for services provided by others but not reported to the Foundation.

Provision for Uncollectible Accounts

The Medical Center establishes an allowance for uncollectible accounts based on many factors, including payer mix, age of receivables, historical cash collection experience, and other relevant information. The Medical Center writes down the expected reimbursement after reasonable collection efforts have been exhausted.

Excess of Revenues Over Expenses

The consolidated statements of activities include the excess of revenues over expenses, which is considered the performance indicator. Changes in unrestricted net assets which are excluded from the excess of revenues over expenses, consistent with industry practice, include contributions of long-lived assets (including assets acquired using contributions which by donor restrictions were to be used for the purposes of acquiring such assets) and changes in benefit plan liabilities.

Inventory

Inventory is stated at cost (using the first-in, first-out method) which is not in excess of market value.

Goodwill

Effective October 1, 2009, the Medical Center purchased the business of a management company that managed the Samuel Oschin Comprehensive Cancer Institute. The purchase price exceeded the fair value of tangible assets acquired by $47,252 which was recorded as goodwill. Goodwill was amortized on a straight-line basis using a forty-year life. As of June 30, 2011, goodwill, which is included in other assets, totaled $46,366 which is net of accumulated amortization of $886. Amortization was not recorded subsequent to June 30, 2010 because on



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July 1, 2010, the Medical Center adopted the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 958, Not-for-Profit Organizations: Mergers and Acquisitions under which amortization is no longer allowed.

Goodwill is evaluated, at minimum, on an annual basis as of June 30 and whenever events and changes in circumstances suggest that the carrying value may not be recoverable. As noted under Recent Accounting Pronouncement, the Medical Center adopted the provisions of Accounting Standards Update (ASU) 2011-08, Testing Goodwill for Impairment, and concluded that it is more likely than not that the fair value of the reporting unit containing goodwill exceeds its carrying value as of June 30, 2011. As such, goodwill was not impaired as of June 30, 2011.

Care of the Poor and Community Benefit

The Medical Center’s mission is to improve the health status of its community regardless of the patient’s ability to pay, including charity patients. A patient is classified as a charity patient in accordance with certain established policies of the Medical Center. Essentially, these policies define charity services as those services for which no payment is anticipated. The Medical Center provides programs and activities that contribute to charity care, care of the poor, and community benefit. These programs and activities serve a majority of persons who are beneficiaries of Medi-Cal, county, state, and federal programs for which the costs of providing the services are not fully reimbursed. Also included are activities that improve the community’s health status, and educate or provide social services to the elderly and children. The Medical Center’s unreimbursed costs for care of the poor and community benefits were approximately 22% and 20% of total operating expenses for the years ended June 30, 2011 and 2010, respectively. The costs associated with these programs and activities are as follows for the years ended June 30:

2011 2010 Traditional Charity Care and Uninsured Patients (Category 1) $ 30,400 $ 32,896 Unpaid Cost of State Programs (Category 2) 121,738 96,192 Unpaid Cost of Specialty Government Programs (Category 3) 1,643 4,725 Unpaid Cost of Federal Programs (Category 4) 276,183 212,076 Research (Category 5) 110,475 96,607 Community Benefit (Category 6) 64,499 63,401 $ 604,938 $ 505,897



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The Medical Center uses six categories to classify care of the poor and community benefit:

Category 1: Traditional Charity Care and Uninsured Patients – (care of the poor) includes the cost of services provided to persons who cannot afford health care because of inadequate resources and/or who are uninsured or underinsured. If there is any subsidy donated for these services, that amount is deducted from the gross amount.

Category 2: Unpaid Cost of State Programs – also benefits the poor, but is listed separately. This amount represents the unpaid cost of services provided to patients in the Medi-Cal program and enrolled in HMO and PPO plans under contract with the Medi-Cal program.

Category 3: Unpaid Costs of Specialty Government Programs – also provides community benefit under such programs as the Veterans Administration, Los Angeles Police Department, Short Doyle, proposition 99, and other programs to benefit the poor. This amount represents the unpaid cost of services provided to patients in these various programs. If this community benefit was not provided, federal, state, or local governments would need to furnish these services.

Category 4: Unpaid Cost of Federal Programs – primarily benefits the elderly. This amount represents the unpaid cost of services provided to patients in the Medicare program and enrolled in HMO and PPO plans under contract with the Medicare program. Included in these amounts are $120,845 and $87,235 for the years ended June 30, 2011 and 2010, respectively, of unpaid cost of services provided to patients in the Medicare program that are also in the Medi-Cal program.

Category 5: Research – cost of providing translational and clinical research and studies on health care delivery. During the years ended June 30, 2011 and 2010, the Medical Center received outside support for its research efforts totaling $52,833 and $47,202, respectively. Thus for the years ended June 30, 2011 and 2010, the net cost borne by the Medical Center was $57,642 and $49,405, respectively.

Category 6: Community Benefit – cost of services that are beneficial to the broader community; i.e., other needy populations that may not qualify as poor but that need special services and support. Examples include the elderly, substance abusers, the homeless, victims of child abuse, and persons with AIDS. They also include the cost of health promotion and education and health clinics and screenings.



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Property and Equipment

Property and equipment acquisitions are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Interest costs incurred during the period of construction of capital assets are capitalized as a component of the cost of acquiring those assets.

Gifts of long-lived assets such as land, buildings, or equipment that do not contain explicit donor stipulations which specify how the donated assets must be used are reported as unrestricted support, and are excluded from operating income. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service.

Software Development Costs

The Medical Center accounts for software development costs in accordance with ASC 350, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. All costs incurred in the planning stage of developing the software are expensed as incurred as are internal and external training costs and maintenance costs. External and internal costs, excluding general and administrative costs and overhead costs, incurred during the applicable development stage of internally used software are capitalized. Such costs include external direct costs of materials and services consumed in development or obtaining the software, payroll and payroll-related costs for employees who are directly associated with and who devote time to developing the software. Development changes that result in appropriate functionality to the software, which enable it to perform tasks that it was previously incapable of performing, are also capitalized.

Capitalized internal use software development costs are amortized on a straight-line basis over their estimated useful life of three to seven years. Amortization begins when all substantial testing of the software is completed and the software is ready for its intended use.



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Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of

The Medical Center accounts for the impairment and disposition of long-lived assets in accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets. In accordance with ASC 360, long-lived assets to be held are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. The Medical Center determined that no assets were impaired at June 30, 2011.

Board Designated Assets

Board designated assets include investments designated by the Medical Center’s Board of Directors (Board) for future capital expenditures, physician programs, academic programs, and fund raising. However, the Board retains control of these assets and will, at its discretion and if necessary, use these assets for operating purposes. As a result, board designated assets are included in current assets.

Assets Limited as to Use

Assets limited as to use include assets held by trustees that are restricted under bond indentures for the acquisition of property and equipment and restricted for the payment of self-insurance liabilities. The current portion of assets limited as to use includes amounts that will be used to pay self-insurance classified as current liabilities.

Investments

The Medical Center has designated its investments in equity securities with readily determinable fair values and all investments in debt securities as “trading” in accordance with ASC 954, Health Care Entities. Those securities are measured at fair value in the accompanying consolidated balance sheets. Fair value is established based on quoted prices from recognized securities exchanges. Management determines the appropriate classification of all investments at the date of purchase and reevaluates such designations at each consolidated balance sheet date.

Investment income or loss included in temporarily restricted net assets (including realized and unrealized gains and losses on investments, interest and dividends) is reported as unrestricted net assets activity unless the income or loss is restricted by donor or law.



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All of the Medical Center’s investments are invested in accordance with Board approved policies, which include, among other matters, targeted investment returns balanced by diversification of the investment portfolio, establishment of credit risk parameters, and limitation in the amount of investment in any single instrument. As part of investment policies and strategies, the Medical Center’s investment committee meets periodically to review performance. At least annually, the investment committee reviews and formulates a specific investment and allocation plan. Any adjustments that are deemed necessary are based on specific criteria, i.e., Medical Center’s necessary funding, obligations, expenses, and liquidity needs.

Alternative Investments

Certain of the Medical Center’s investments are made through alternative investments, which include investments in limited partnerships and limited liability companies. The Medical Center generally contracts with fund managers who have full discretionary authority over investment decisions. The Medical Center accounts for its ownership interests in the partnerships using the equity method of accounting. These investments provide the Medical Center with a proportionate share of the entities’ gains and losses, which is included in investment income in the accompanying consolidated statements of activities. As of June 30, 2011 and 2010, these alternative investments comprised approximately 29% and 27%, respectively, of the Medical Center’s total cash, cash equivalents, and investments.

Alternative investments include certain other risks that may not exist with other investments that are more widely traded. These risks include reliance on the skill of the fund managers, who often employ complex strategies with various financial instruments, including futures contracts, foreign currency contracts, structured notes and other investment vehicles. Additionally, alternative investments may have limited information on a fund’s underlying assets and valuation, and limited redemption or redemption-penalty provisions. Management believes that the Medical Center, in consultation with its investment committee, has the capacity to analyze and interpret the risks associated with alternative investments, and with this understanding, has determined that investing in these investments creates a balanced approach to its portfolio management.



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Deferred Financing Costs

Costs incurred in obtaining long-term financing are amortized over the term of the related debt using the effective interest method. Unamortized deferred financing costs were $12,026 and $12,894 at June 30, 2011 and 2010, respectively, and are included in other assets.

Medical Malpractice Insurance

The Medical Center is self-insured for the first $3,000 in professional malpractice and general liability losses per occurrence effective October 1, 2005, and was self-insured for the first $2,000 effective October 1, 2004, and $1,000 for prior periods. The Medical Center purchases excess insurance coverage resulting in total coverage of $100,000 per occurrence insuring all employees, volunteers, and members of the medical staff. Effective for the year beginning October 1, 2005, the insurance purchased provided a $10,000 annual aggregate excess of the first $1,000 for every claim. The Medical Center had no aggregate limit for the three years beginning October 1, 2002. Accruals for uninsured claims and claims incurred but not reported are estimated by an actuary based on the Medical Center’s claims experience. Such accruals, which totaled $50,573 and $45,168 at June 30, 2011 and 2010, respectively, are recorded using a 1.7% and 1.8% discount factor at June 30, 2011 and 2010, respectively. The basis for the rate is the risk-free rate of return at the end of each year and the estimated period over which claims will be settled.

Workers’ Compensation Insurance

The Medical Center carries workers’ compensation insurance insuring employees with a self-insured primary limit of $1,000 effective February 1, 2005 and decreasing amounts in earlier years. Accruals for uninsured claims and claims incurred but not reported are estimated by an actuary based upon the Medical Center’s claims experience. Such accruals, which totaled $43,187 and $41,272 at June 30, 2011 and 2010, respectively, are recorded using a 2.4% discount factor at June 30, 2011 and 2010. The basis of the rate is the risk-free rate of return at the end of each year and the estimated period over which claims will be settled.



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Cash Equivalents

The Medical Center considers all highly liquid debt instruments with maturity dates at the time of purchase of three months or less to be cash equivalents.

Donor-Restricted Gifts

Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. Conditional promises to give cash and indications of intentions to give are not recognized until the conditions are satisfied or removed. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the consolidated statements of activities as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reflected as unrestricted contributions in the accompanying consolidated financial statements.

Fair Value of Financial Instruments

The Medical Center’s consolidated balance sheets include the following financial instruments: cash and cash equivalents, investments, patient accounts receivable, accounts payable and other accrued liabilities, pension liabilities, and long-term obligations. The Medical Center considers the carrying amounts of current assets and liabilities in the consolidated balance sheets to approximate the fair value of these financial instruments because of the relatively short period of time between origination of the instruments and their expected realization. Pledges receivable, accrued workers’ compensation, malpractice insurance claims, and pension liabilities are recorded at their estimated present value using appropriate discount rates. Marketable securities are recorded at fair value based on quoted prices from recognized security exchanges and other methods as further described in Note 5. Alternative investments are recorded using the equity method of accounting, which approximates fair value. Tax-exempt financings are carried at amortized cost. The fair value of tax-exempt financings is estimated based on current market rates as further described in Note 3.



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Income Taxes

The Medical Center and its related affiliates, except for Greater Valley MSO, have been determined to qualify as exempt from federal and state income taxes under 501(a) as organizations described in Section 501(c)(3) of the Internal Revenue Code.

Most of the income received by the Medical Center is exempt from taxation, as income related to the mission of the organization. Accordingly, there is no material provision for income tax for these entities. However, some of the income received by the exempt entities is subject to taxation as unrelated business income. The Medical Center and its subsidiaries file federal and state income tax returns.

Concentrations of Credit Risk

Financial instruments which potentially subject the Medical Center to concentrations of credit risk consist primarily of investments and accounts receivable. Investments are made in a variety of financial instruments with prudent diversification requirements. The Company seeks diversification among its investments by limiting the amount of investments that can be made with any one obligor. The investment portfolio is managed by professional investment managers within the guidelines established by the Board, which, as a matter of policy, limit the amounts which may be invested in any one issuer.

The Medical Center grants credit without collateral to its patients, most of whom are area residents and are insured under third-party agreements. The mix of net receivables from patients and third-party payers at June 30 is:

2011 2010 Medicare 17% 16% Medi-Cal 6% 9% Other third-party payers 72% 71% Self-pay and other 5% 4% 100% 100%



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The Medical Center is subject to a wide variety of federal regulatory actions and legislative and policy changes by those governmental and private agencies that administer the Medicare and Medi-Cal programs. Laws and regulations governing the Medicare and Medi-Cal programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future government review and interpretation.

Recent Accounting Pronouncements

In May 2009, the FASB issued ASC 958 Not-for-Profit Entities. ASC 958 establishes principles to assist not-for-profit entities in determining if a combination is to be accounted for as a merger or an acquisition. ASC 958 applies the carryover (similar to pooling) method to a merger, and the purchase accounting method to an acquisition, and clarifies the valuation basis to be used in determining the values of assets and liabilities being acquired. In addition, ASC 958 makes provisions related to goodwill and non-controlling interest fully applicable to not-for-profit entities. Goodwill and certain indefinite-lived intangible assets are no longer are amortized, and are instead are subject to annual impairment evaluations.

ASC 958 guidance is effective for fiscal years beginning after December 15, 2009, or for mergers (as defined in ASC 958) that occur after December 15, 2009, and retroactive application is prohibited. The impact of ASC 958 substantively changes the accounting for certain business combinations, which prior to the effective date may have been accounted for similar to the pooling of interests method. The Medical Center adopted the merger and acquisition provisions of ASC 958 on December 16, 2009 and adopted the other provisions of ASC 958 effective July 1, 2010. The Medical Center’s adoption of the merger and acquisition provisions of ASC 958 did not have a material effect on the consolidated financial statements. The Medical Center’s July 1, 2010 adoption of the other provisions of ASC 958 eliminated the amortization of goodwill, eliminating $1,181 of amortization expense in fiscal 2011 which would have been recorded if of ASC 958 were not adopted.

In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amended ASC 820 to clarify certain existing fair value disclosures and require a number of additional disclosures. The guidance in ASU 2010-06 clarified that disclosures should be presented separately for each “class” of assets and liabilities measured at fair value and provided guidance on how to determine the appropriate classes of assets and liabilities to be presented. ASU 2010-06 also clarified the requirement for entities to disclose



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information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. In addition, ASU 2010-06 introduced new requirements to disclose the amounts (on a gross basis) and reasons for any significant transfers between Levels 1, 2, and 3 of the fair value hierarchy and present information regarding the purchases, sales, issuances, and settlements of Level 3 assets and liabilities on a gross basis. With the exception of the requirement to present changes in Level 3 measurements on a gross basis, which was delayed until reporting periods beginning after December 15, 2010, the guidance in ASU 2010-06 is effective for reporting periods beginning after December 15, 2009. Except for the requirement to present changes in Level 3 measurements on a gross basis, the Medical Center adopted all other provisions of ASU 2010-06 in fiscal 2011. The adoption did not have a material effect on the consolidated financial statements.

In August 2010, the FASB issued ASU No. 2010-23, Measuring Charity Care for Disclosure. ASU 2010-23 provides guidance regarding the measurement basis for charity care disclosure purposes. Under this guidance the charity care disclosure should be measured based on the direct and indirect costs of providing these services. ASU 2010-23 is effective for fiscal years beginning after December 15, 2010. As the Medical Center is currently reporting its charity care on this basis, adoption of this guidance will not have any effect on the Medical Center’s consolidated financial statement disclosures.

In August 2010, the FASB issued ASU No. 2010-24, Presentation of Insurance Claims and Related Insurance Recoveries. ASU 2010-24 concluded that health care entities should no longer net insurance recoveries against a related claim liability. Additionally conclusions were reached that the claim liability should be determined without consideration of insurance recoveries. ASU 2010-24 is effective for fiscal years beginning after December 15, 2010. The Medical Center is currently evaluating the effect that the provisions of ASU 2010-24 will have on its consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 amended ASC 820, to converge the fair value measurement guidance in U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs). Some of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular principle in ASC 820. In addition, ASU 2011-04 requires additional fair value disclosures, although certain of these new disclosures will not be required



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for nonpublic entities. The amendments are to be applied prospectively and are effective for annual periods beginning after December 15, 2011. The Medical Center is currently evaluating the effect that the provisions of ASU 2011-04 will have on its consolidated financial statements.

In July 2011, the FASB issued ASU 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. The purpose of ASU 2011-07 is to require certain health care entities to change the presentation of their statement of activities by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. The amendments are to be applied retrospectively and are effective for annual periods beginning after December 15, 2011. The Medical Center is currently evaluating the effect that the provisions of ASU 2011-07 will have on its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment. ASU 2011-08 amended ASC 350 and provides entities the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test previously provided for in ASC 350. An entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011, however, early adoption is permitted. The Medical Center adopted ASU 2011-08 as of June 30, 2011 and concluded that there was no impairment of goodwill based on the qualitative assessment allowed for under this new guidance.



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2. Property and Equipment

Property and equipment consists of the following at June 30:

2011 2010 Land $ 56,522 $ 26,014 Buildings and land improvements 1,260,940 1,204,346 Equipment and software 805,915 710,299 Equipment under capital leases – 1,351 Construction in process 335,207 193,384 2,458,584 2,135,394 Less accumulated depreciation 1,079,391 968,562 $ 1,379,193 $ 1,166,832

Construction in process consists of the following at June 30:

2011 2010 Buildings and land improvements $ 253,631 $ 142,160 Equipment 5,111 3,603 Computer systems and software 64,293 41,789 Capitalized interest 12,172 5,832 $ 335,207 $ 193,384

If each project included in construction in process were placed in service at June 30, 2011, at the costs capitalized at that date, the Medical Center’s annual depreciation would increase by approximately $19,936. This estimate of incremental annual depreciation is subject to change as additional costs are incurred to complete these projects.

The Medical Center estimates that it will cost approximately $815,129 to complete the projects currently under construction.



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2. Property and Equipment (continued)

Software and software implementation costs, which are classified in “Equipment and Software,” include the following at June 30:

2011 2010 Cost $ 283,501 $ 199,502 Accumulated amortization 71,225 43,896 $ 212,276 $ 155,606 Amortization expense during the year $ 27,329 $ 15,331 Weighted average life in years 6.7 6.8 Estimated future amortization expense:

2012 $ 39,160 2013 38,959 2014 36,612 2015 35,718 2016 32,554 Thereafter 29,273

$ 212,276 Cost includes the cost of completed projects and the cost and capitalized interest related to projects in the process of implementation. Estimated future amortization includes the amortization of projects in the process of implementation assuming the cost at June 30, 2011 is the cost of the completed project.

During fiscal 2006, the Medical Center completed the construction of a new patient care tower. The Federal Emergency Management Agency (FEMA) provided a grant to enhance the earthquake resistance of the patient care tower. These funds were restricted for the purpose of repairing or reconstructing certain acute care hospital facilities under the Seismic Hazard Mitigation Program for Hospitals (SHMPH). In exchange, FEMA holds an eight-year lien against the reconstructed or rehabilitated facility in the amount of the funds granted and is entitled to withhold or recover all or a portion of the SHMPH funds if the Medical Center experiences a “Change in Function” or a “Change in Status,” as defined under SHMPH. The



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2. Property and Equipment (continued)

Medical Center is obligated to reimburse FEMA if the rehabilitated facility is either no longer operated and maintained as an acute care inpatient hospital (change in function), or if a material amount of the facility’s assets are sold, transferred, leased, or disposed of to a for profit entity (change in status). The liens held by FEMA expire at various dates through 2014. The amount received of $32,157 is being amortized as a reduction of depreciation expense over the life of the patient care tower.

3. Long-Term Debt

Long-term debt consists of the following at June 30:

2011 2010 $535,000 Revenue Bonds, Series 2009, principal

payments of $1,045 to $68,860 are due annually through 2039; interest is payable semiannually at 3% to 5%; the amount reported includes unamortized premium of $5,576 and $5,851 at June 30, 2011 and 2010, respectively $ 522,126 $ 540,851

$518,820 Revenue Bonds, Series 2005, principal

payments of $8,180 to $42,270 are due annually through 2035; interest is payable semiannually at 5%; the amount reported includes unamortized premium of $13,852 and $14,775 at June 30, 2011 and 2010, respectively 507,322 516,005

$106,555 Insured Revenue Bonds, Series 1997A,

principal payments of $255 to $11,010 are due annually through 2028; interest is payable semiannually at 5% to 5.25% 101,390 101,630

$63,445 Insured Revenue Bonds, Series 1997B,

principal payments of $665 to $6,890 are due annually through 2028; interest is payable semiannually at 5% to 5.125% 59,005 59,790



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3. Long-Term Debt (continued)

2011 2010 $108,825 Hospital Revenue Certificates of

Participation, Series 1992, principal payments of $6,265 to $6,830 are due annually through 2013; interest is payable semiannually at 6.5% $ 13,095 $ 18,835

1,202,938 1,237,111 Less current maturities 34,455 32,975 $ 1,168,483 $ 1,204,136

In October 2009, the Medical Center issued $535,000 of California Heath Facilities Financing Authority Revenue Bonds. The proceeds totaled $541,045 including a premium of $6,045 which is being amortized as a reduction of interest expense over the life the bonds. Issuance costs of $5,473 were incurred in connection with the offering; these costs were paid from the Medical Center’s working capital. The proceeds will be used to finance the acquisition, construction, renovation, remodeling, and equipping of the health facilities owned and operated by the Medical Center.

The fair value of the tax-exempt financings, based on current market rates for debt of the same risk and maturities, was estimated to be $1,171,064 and $1,208,481 at June 30, 2011 and 2010, respectively.

Revenue of the Medical Center (excluding all other related organizations) is pledged to secure the payment of the principal and interest on all bonds and certificates under a Master Trust Indenture (Indenture). The Indenture contains covenants restricting additional debt and providing for the maintenance of certain financial ratios. The Medical Center was in compliance with these covenants at June 30, 2011.

The Medical Center has a $50,000 credit agreement (the Agreement) with a bank that expires in September 2012. The Medical Center may borrow under the Agreement at the Eurodollar rate plus a premium of .35% to 1.25% based on the Medical Center’s Moody’s rating. The June 30, 2011 rate was the Eurodollar rate plus .4% (.75%). Under the Agreement, the Medical Center pays an annual commitment fee based on the unused commitment; this rate varies from .06% and .25% based on the Medical Center’s Moody’s rating and the rate at June 30, 2011 was .08%. The Agreement contains provisions providing for the maintenance of certain financial ratios. The



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3. Long-Term Debt (continued)

Medical Center was in compliance with these covenants at June 30, 2011. The Agreement is secured on a parity basis under the Indenture with the tax-exempt financings of the Medical Center. No amounts have been borrowed under the Agreement.

The combined aggregate amount of maturities and sinking fund requirements (excluding the unamortized premium of $19,428 at June 30, 2011) for the five fiscal years succeeding June 30, 2011, and thereafter, is as follows:

2012 $ 34,455 2013 36,140 2014 37,935 2015 33,965 2016 26,955 Thereafter 1,014,060 $ 1,183,510

For the years ended June 30, 2011 and 2010, interest costs incurred totaled $59,449 and $52,815 respectively, of which $10,614 and $6,121, respectively, was capitalized as part of the cost of construction in process.

4. Retirement Plans

During 1990, the Board authorized the suspension of the Medical Center’s noncontributory defined benefit plan, which covered substantially all eligible employees (the Suspended Employee Plan). Benefit accruals under the Suspended Employee Plan were suspended effective December 31, 1990. Effective July 1, 2003, the Medical Center began offering a defined benefit plan to its employees. Rather than design a new plan, the Medical Center amended the Suspended Employee Plan (the Defined Benefit Plan) to capture the new defined benefit activity.

During 1991, the Medical Center implemented a defined contribution plan (the Defined Contribution Plan) covering substantially all employees covered under the Suspended Employee Plan. Contributions under the Defined Contribution Plan are calculated based on each employee’s salary and totaled $50,077 and $44,849, for the years ended June 30, 2011 and 2010, respectively. Employees have the choice of participation in either the Defined Benefit Plan or the Defined Contribution Plan and can change the selection once during their employment.



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4. Retirement Plans (continued)

In addition, certain key employees of the Medical Center are covered by separate defined contribution and defined benefit retirement plans which are not governed by the Employee Retirement Income Security Act of 1974. Contributions under this defined contribution plan are calculated based on each key employee’s salary and totaled $13,742 and $10,763 for the years ended June 30, 2011 and 2010, respectively.

The following tables present information related to changes in projected benefit obligations, plan assets and their composition, funded status, the accumulated benefit obligation, and net periodic pension cost for all defined benefit plans at June 30 and for the year then ended. The Medical Center has established a policy to ensure that the plans are fully funded. Pursuant to this policy the Medical Center contributed $14,500 and $16,500 to the plans in September 2011 and 2010, respectively.

2011 2010 Change in projected benefit obligations:

Projected benefit obligations at beginning of year $ 225,252 $ 170,075 Service cost 13,221 10,390 Interest cost 11,923 11,291 Actuarial losses 8,688 38,059 Benefits paid (8,515) (4,563)

Projected benefit obligations at end of year 250,569 225,252 Change in plan assets:

Fair value of plan assets at beginning of year 208,857 154,948 Actual gain on plan assets 21,978 8,674 Employer contributions 20,499 50,806 Benefits paid (8,515) (4,563)Expenses paid (1,209) (1,008)

Fair value of plan assets at end of year 241,610 208,857 Funded status $ (8,959) $ (16,395)



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2011 2010 Composition of plan assets:

Short-term money market funds 4% 32%Government debt 28 31 Equity securities 8 7 Mutual funds 60 30 100% 100%

Amounts recognized as other assets in the consolidated

balance sheets $ 5,456 $ – Amounts recognized as other liabilities in the

consolidated balance sheets $ 14,415 $ 16,395 Items not yet recognized as a component of net periodic

pension costs: Unamortized prior service costs $ 113 $ 277 Unrecognized losses 80,427 90,611

$ 80,540 $ 90,888 Accumulated benefit obligations $ 228,214 $ 206,844 Net periodic benefit cost recognized:

Service cost $ 13,221 $ 10,390 Interest cost 11,923 11,291 Expected return on plan assets (12,892) (9,481)Recognized losses 10,046 5,434 Amortization of prior service costs 164 164

Net periodic benefit cost $ 22,462 $ 17,798 Weighted-average assumptions used to determine the

benefit obligations consist of the following: Discount rate 5.5% 5.4%Expected long-term rate of return on plan assets 5.5% – 5.75% 5.5% – 6.5%Rate of increase in future compensation levels 3% – 5% 3% – 5%



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The expected rate of return on plan assets is updated annually, taking into consideration the plan’s asset allocation, historical returns on the types of assets held in the trusts, and the current economic environment.

The estimated net loss and prior service cost for the defined benefit plans that will be amortized into net periodic benefit cost over the next fiscal year are $8,266 and $113, respectively.

Plan Assets

Approximately 76% of plan assets relate to long-term investment activities covering the Medical Center’s general employee population. For this group, the target asset allocation is approximately 70% mutual funds and 30% equities and debt securities. The other 24% of the assets relate to an employee population closer to retirement and the asset allocation is 100% debt securities and mutual funds.

The Medical Center uses a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

• Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments. This includes model-derived valuation whose significant inputs are observable.

• Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.



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Fair values are based on one or more of three valuation techniques. The valuation techniques are as follows:

a) Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

b) Cost approach. Amount that would be required to replace the service capacity of asset (replacement cost).

(c) Income approach. Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing, and excess earnings models).

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following table presents the financial instruments carried at fair value as of June 30, 2011, by valuation hierarchy.

Level 1 Level 2 Level 3 Total

Valuation Technique

(a,b,c) Cash $ 8,585 $ – $ – $ 8,585 a Equities 19,989 – – 19,989 a U.S. Treasury securities 62,454 – – 62,454 a Mortgage-backed securities – 4,802 – 4,802 a Mutual funds (a) 145,780 – – 145,780 a $ 236,808 $ 4,802 $ – $ 241,610

(a) 38% of mutual funds invest in bonds, 12% invest in global equities, and the remaining 50% invest globally in a diverse range of equities, bonds, and commodities.



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The following table represents the financial instruments carried at fair value as of June 30, 2010, by valuation hierarchy.

Level 1 Level 2 Level 3 Total

Valuation Technique

(a,b,c) Cash $ 67,506 $ – $ – $ 67,506 a Equities 15,129 – – 15,129 a U.S. Treasury securities 60,282 – – 60,282 a Corporate bonds – 191 – 191 a Mortgage-backed securities – 3,145 – 3,145 a Mutual funds (b) 62,604 – – 62,604 a $ 205,521 $ 3,336 $ – $ 208,857

(a) 43% of mutual funds invest in bonds, 16% invest in equities to achieve long-term capital appreciation with an emphasis on natural resources, 14% invest in global equities, and the remaining 27% invest globally in a diverse range of equities, bonds, and commodities.

Plan Investment Strategy

The Medical Center’s investment policy generally reflects the long-term nature of the pension plan’s funding obligations. Assets are invested to achieve a rate of return consistent with policy allocation targets, which significantly contributes to meeting the current and future obligations of the plan and strives to help ensure solvency of the plan over time. This objective is to be achieved through a well-diversified asset portfolio and emphasis on long-term capital appreciation as a primary source of return. The plan utilizes a multi-manager structure of complimentary investment styles and classes. Manager qualitative performance is continually evaluated, while a manager’s investment performance is judged over an investment market cycle of at least three years.

Plan assets are exposed to risk and fluctuations in market value from year to year. To minimize risk, each manager maintains a diversification of their portfolio to insulate the portfolio from substantial losses in any single security or sector of the market. The asset allocation is reviewed for deviations in the allowable range for each asset class, and rebalancing is implemented as necessary.



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The long-term rate of return of the plan investment allocation is designed to be commensurate with a conservatively managed balance allocation. Fixed-income securities are to consist of investment grade bonds.

Each investment type is managed by an asset manager specializing in various security types. The investment objective of the Plan over a three- to five-year period is to produce a rate of return that equals or exceeds the appropriate bond index fund for domestic equity, the S&P 500 stock index, and international equity (the EAFE) or other appropriate international stock index.

As part of investment policies and strategies, the plans’ investment committee meets periodically to review performance. At least annually, the investment committee reviews and formulates the specific investment and allocation plan. Any adjustments that are deemed necessary are based on specific criteria, i.e., necessary plan funding, plan obligations, plan expenses, and plan liquidity needs.

Plan Cash Flows

In 2012, the Medical Center expects to contribute $17,062 to the plans. In addition, any amount needed to ensure that the plans are fully funded will be contributed.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

2012 $ 9,702 2013 10,277 2014 12,285 2015 14,217 2016 15,796 2017-2020 103,941



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5. Investments

Investments, including cash and cash equivalents, short-term investments, board designated assets limited as to use, long-term investments and permanently restricted assets, consist of the following at June 30:

2011 2010 Cash and cash equivalents $ 316,251 $ 340,955 Equities 42,831 23,825 U.S. government debt 601,376 668,358 Corporate debt (domestic) 20,660 7,078 Foreign government debt 13,185 12,953 Alternative investments 485,510 421,111 Mutual funds and other 190,851 110,761 $ 1,670,664 $ 1,585,041

Investments are combined with cash and cash equivalents and pledges receivable and classified as follows for presentation in the accompanying consolidated balance sheets:

Cash, Cash Equivalents,

and Investments Pledges Total June 30, 2011:

Cash and cash equivalents $ 227,685 $ – $ 227,685 Short-term investments 557,311 – 557,311 Board designated assets 425,803 – 425,803 Assets limited to use, including current

portion 106,426 – 106,426 Long-term investments 164,619 – 164,619 Assets restricted for the acquisition

of property and equipment 2,899 1,925 4,824 Permanently restricted assets 185,921 37,127 223,048

$ 1,670,664 $ 39,052 $ 1,709,716



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5. Investments (continued)

Cash, Cash Equivalents,

and Investments Pledges Total June 30, 2010:

Cash and cash equivalents $ 314,930 $ – $ 314,930 Short-term investments 296,379 296,379 Board designated assets 342,074 – 342,074 Assets limited to use, including current

portion 295,964 – 295,964 Long-term investments 156,691 – 156,691 Assets restricted for the acquisition of

property and equipment 2,269 2,175 4,444 Permanently restricted assets 176,734 39,095 215,829

$ 1,585,041 $ 41,270 $ 1,626,311 Assets limited to use include the following at June 30:

2011 2010 Restricted for payment of certain self-insurance

liabilities $ 12,608 $ 12,655 Restricted under bond indentures for the acquisition

of property and equipment 93,818 283,309 $ 106,426 $ 295,964



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Investment income on cash and cash equivalents, investments, and assets limited as to use consists of the following for the years ended June 30:

2011 2010 Interest and dividend income $ 6,417 $ 708 Realized gains (losses) 12,222 (3,948)Unrealized gains, net 73,682 55,802 Investment income included in the consolidated

statements of activities as unrestricted net assets $ 92,321 $ 52,562 Investment income on workers’ compensation trust funds and medical malpractice funds totaled $3,696 and $63 for the years ended June 30, 2011 and 2010, respectively.

The following tables present the financial instruments carried at fair value as of June 30, 2011 and 2010, respectively, by valuation hierarchy as defined in Note 4. Alternative investments (see Note 1) are accounted for using the equity method of accounting, which is not a fair value measurement. There were no significant transfers between levels 1, 2, and 3 during the years ended June 30, 2011 and 2010. See Note 4 for valuation techniques.

Level 1 Level 2 Level 3 Fair

Value Equity Method

Carrying Value

ValuationTechnique

(a,b,c) June 30, 2011:

Equities $ 40,726 $ – $ 2,105 $ 42,831 $ – $ 42,831 a,b U.S. government debt 601,376 – – 601,376 – 601,376 a Corporate debt (domestic) – 20,661 – 20,661 – 20,661 a Foreign government debt – 13,184 – 13,184 – 13,184 a Alternative investments – – – – 485,510 485,510 Mutual funds and other 190,851 – – 190,851 – 190,851 a

$ 832,953 $ 33,845 $ 2,105 $ 868,903 $ 485,510 $ 1,354,413



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Level 1 Level 2 Level 3 Fair

Value Equity Method

Carrying Value

ValuationTechnique

(a,b,c) June 30, 2010:

Equities $ 23,525 $ – $ 300 $ 23,825 $ – $ 23,825 a,b U.S. government debt 664,339 – – 664,339 – 664,339 a Corporate debt (domestic) – 11,097 – 11,097 – 11,097 a Foreign government debt – 12,953 – 12,953 – 12,953 a Alternative investments – – – – 421,111 421,111 Mutual funds and other 110,761 – – 110,761 – 110,761 a

$ 798,625 $ 24,050 $ 300 $ 822,975 $ 421,111 $ 1,244,086

The Medical Center received restricted and unrestricted pledges and contributions amounting to $38,105 for the year ended June 30, 2011 that were subject to fair value measurement. Contributions were measured based on the actual cash received, or for pledge receivables, using discounted cash flow projections. Approximately $13,680 of the contributions received in fiscal 2011 was recorded as a pledge receivable as of June 30, 2011.

6. Temporarily and Permanently Restricted Net Assets

Temporarily restricted net assets are available for the following purposes at June 30:

2011 2010 Health care services $ 168,492 $ 159,099 Purchase of capital assets 4,824 4,444 Health education and research 59,277 59,188 $ 232,593 $ 222,731

During the years ended June 30, 2011 and 2010, net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes of health care services and health education totaling $114,943 and $107,859, respectively, and capital expenditures totaling $787 and $1,194, respectively.

Permanently restricted assets and net assets at June 30, 2011 and 2010, are restricted to investments that are to be held in perpetuity to provide a permanent source of income.



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6. Temporarily and Permanently Restricted Net Assets (continued)

Pledges are recognized as contributions at the present value of expected future payments. The discount rate used is the estimated risk free discount rate at the time of the donation (2.42% – 7.18%). Pledges receivable in temporarily and permanently restricted net assets are scheduled to be received as follows at June 30:

2011 2010 Due in one year or less $ 18,967 $ 21,408 Due after one year through five years 38,052 40,232 Due after five years 57,858 57,654 114,877 119,294 Less amount representing interest 21,865 22,283 Pledges receivable, net $ 93,012 $ 97,011

Of the $93,012 and $97,011 pledges receivable at June 30, 2011 and 2010, respectively, $39,052 and $41,270 has been reflected in assets restricted for the acquisition of property and equipment and permanently restricted net assets in the accompanying consolidated balance sheets (see Note 5).

During the years ended June 30, 2011 and 2010, the Medical Center had the following endowment related activities (the amounts reported for 2010 have been revised to conform with the 2011 presentation):

Permanently

Restricted Unrestricted Total Year ended June 30, 2011:

Endowment net assets, beginning of year $ 215,829 $ 138,085 $ 353,914 Contributions 7,162 42,964 50,126 Investment income 9,168 16,062 25,230 Transfers of investment income to:

Temporarily restricted funds (6,813) – (6,813)Unrestricted funds (2,298) (1,450) (3,748)

Endowment net assets, end of year $ 223,048 $ 195,661 $ 418,709



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Permanently

Restricted Unrestricted Total Year ended June 30, 2010:

Endowment net assets, beginning of year $ 195,742 $ 99,810 $ 295,552 Contributions 20,033 29,352 49,385 Investment income 8,378 10,159 18,537 Transfers of investment income to:

Temporarily restricted funds (6,011) – (6,011)Unrestricted funds (2,313) (1,236) (3,549)

Endowment net assets, end of year $ 215,829 $ 138,085 $ 353,914 The Medical Center’s endowment consists of approximately 180 individual funds for a variety of purposes. Its endowment includes both donor-restricted endowment funds and funds designated by the Board of Directors to function as endowments. As required by generally accepted accounting principles, net assets associated with endowment funds, including funds designated by the Board of Directors to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions.

The Medical Center’s Board has interpreted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as requiring the preservation of the corpus of the various donor-restricted endowment funds, absent explicit donor stipulations to the contrary. As a result of this interpretation, the Medical Center classifies as permanently restricted net assets (a) the original value of gifts donated, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. California’s adoption of UPMIFA in January 2009 added certain prudent spending measures to the previous guidance. Management has determined that there is no significant impact related to this new guidance as temporarily restricted net assets are typically appropriated in a manner consistent with the standard of prudence prescribed by UPMIFA at the time the donor’s restrictions are met.



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The Medical Center has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowments. Endowment assets include those assets of donor-restricted funds that the organization must hold in perpetuity as well as board-designated funds. Under this policy, as approved by the Board of Directors, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield of market benchmarks. Actual returns in any given year may vary from this goal.

To satisfy the long-term rate of return objectives, the Medical Center relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Medical Center targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term objectives within prudent constraints.

7. Commitments and Contingencies

Pending claims and legal proceedings at June 30, 2011 are set forth below. For all matters, where a loss is reasonably possible and estimable, an estimate of the loss or a range of loss is provided. Where no estimate is provided, a loss is not reasonably possible or an amount of loss is not reasonably estimable at this time.

CT Brain Perfusion Lawsuit. The Medical Center is the defendant in approximately 80 individual lawsuits which are deemed related matters in the California Superior Court (complex division). The lawsuits stem from allegations that approximately 268 patients received excessive amounts of radiation during brain perfusion scans performed at the Medical Center between January 2008 and August 2009 using CT scanners manufactured by GE Healthcare, a unit of General Electric Company (GE). GE is a co-defendant in these actions, as is Cedars-Sinai Medical Imaging Group, Inc. Excess exposure is thought to have occurred at Cedars-Sinai and other institutions using the GE CT scanners when technologists employed the GE machines using an automatic setting which was erroneously believed to limit the amount of radiation dosage to the minimal amount consistent with appropriate image quality. Discovery is just commencing, so the total estimation of exposure cannot be estimated.



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7. Commitments and Contingencies (continued)

Other. In addition to the above, the Medical Center is a defendant in various other legal actions arising from the normal conduct of business. Management believes that the ultimate resolution of all proceedings will not have a material adverse effect upon the financial position, results of operations, or cash flow of the Medical Center. Further, new claims or inquiries may be initiated against the Medical Center from time to time. These matters could (1) require the Medical Center to pay substantial damages or amounts in judgments or settlements, which individually or in the aggregate could exceed amounts, if any, that may be recovered under our insurance policies where coverage applies and is available, (2) cause the Medical Center to incur substantial expenses, and (3) require significant time and attention from management.

The Medical Center cannot predict the results of current or future claims and lawsuits. The Medical Center recognizes that, where appropriate, the Medical Center’s interests may be best served by resolving certain matters without litigation. If non-litigated resolution is not appropriate or possible with respect to a particular matter, the Medical Center will defend itself vigorously. The ultimate resolution of claims against the Medical Center, individually or in the aggregate, could have a material adverse effect on the Medical Center’s business (both in the near and long term), financial condition, results of operations, or cash flows.

The Medical Center records reserves for claims and lawsuits when they are probable and can be reasonably estimated. For matters where the likelihood or extent of loss is not probable or cannot be reasonably estimated, the Medical Center has not recognized in the accompanying consolidated financial statements the potential liabilities that may result.

The Medical Center leases certain office space under the terms of noncancelable operating leases that expire at various dates, some of which contain renewal options. Future minimum lease commitments under noncancelable operating leases are as follows:

2012 $ 38,922 2013 38,608 2014 38,140 2015 35,251 2016 31,819 Thereafter 70,799 $ 253,539



1107-1272406 41

7. Commitments and Contingencies (continued)

Rental expense was $47,174 and $43,144 during the years ended June 30, 2011 and 2010, respectively.

8. Functional Expenses

The Medical Center provides general health care services to residents within its geographic location. Expenses related to providing these services are as follows for the years ended June 30:

2011 2010 Health care services $ 2,228,520 $ 1,965,567 General and administrative 295,730 267,751 Fund raising 20,455 17,610 $ 2,544,705 $ 2,250,928

9. Subsequent Events

The Medical Center evaluated subsequent events through October 19, 2011, which is the date these consolidated financial statements were issued.

1107-1272406

Other Financial Information

1107-1272406 42

Report of Independent Auditors on Other Financial Information

Board of Directors Cedars-Sinai Medical Center

Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The accompanying consolidating balance sheets as of June 30, 2011 and 2010, and the consolidating statements of activities for the years then ended, are presented for purposes of additional analysis and are not a required part of the basic consolidated financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.

ey October 19, 2011

A member firm of Ernst & Young Global Limited

Ernst & Young LLP Suite 500 725 South Figueroa Street Los Angeles, CA 90017-5418 Tel: +1 213 977 3200 Fax: +1 213 977 3729 www.ey.com


MedicalCenter Foundation Others Consolidated

AssetsCurrent assets:

Cash and cash equivalents 214,750$ 12,824$ 111$ 227,685$ Investments 556,664 – 647 557,311 Board designated assets 425,803 – – 425,803 Current portion of assets limited as to use 12,010 – – 12,010 Patient accounts receivable, net 387,023 6,324 – 393,347 Inventory 21,484 – – 21,484 Due from affiliates 200 (200) – – Prepaid expenses and other assets 67,795 8,357 12 76,164

Total current assets 1,685,729 27,305 770 1,713,804

Assets limited as to use, less current portion 94,416 – – 94,416 Property and equipment, net 1,370,461 8,400 332 1,379,193 Investments 164,619 – – 164,619 Assets restricted for the acquisition of property and equipment 4,824 – – 4,824 Pledges receivable 53,960 – – 53,960 Permanently restricted net assets 223,048 – – 223,048 Other assets 91,563 272 – 91,835 Total assets 3,688,620$ 35,977$ 1,102$ 3,725,699$

Consolidating Balance Sheet

June 30, 2011(Dollar amounts expressed in thousands)

43 1107-1272406



Liabilities and net assetsCurrent liabilities:

Accounts payable and other accrued liabilities 192,667$ 12,714$ 1,044$ 206,425$ Due to third-party payers 3,847 – – 3,847 Accrued payroll and related liabilities 199,534 2,421 93 202,048 Current maturities of long-term debt 34,455 – – 34,455

Total current liabilities 430,503 15,135 1,137 446,775

Long-term debt, less current maturities 1,168,483 – – 1,168,483 Accrued workers’ compensation and malpractice insurance

claims, less current portion 68,027 – – 68,027 Other liabilities 44,852 685 104 45,641


Net assets:Unrestricted 1,521,114 20,157 (139) 1,541,132 Temporarily restricted 232,593 – – 232,593 Permanently restricted 223,048 – – 223,048

Total net assets 1,976,755 20,157 (139) 1,996,773 Total liabilities and net assets 3,688,620$ 35,977$ 1,102$ 3,725,699$

Consolidating Balance Sheet (continued)


44 1107-1272406



AssetsCurrent assets:

Cash and cash equivalents 303,307$ 10,876$ 747$ 314,930$ Investments 296,193 – 186 296,379 Board designated assets 342,074 – – 342,074 Current portion of assets limited as to use 11,512 – – 11,512 Patient accounts receivable, net 378,200 5,531 – 383,731 Inventory 17,290 – – 17,290 Due from affiliates 200 (200) – – Prepaid expenses and other assets 36,712 6,698 62 43,472

Total current assets 1,385,488 22,905 995 1,409,388

Assets limited as to use, less current portion 284,452 – – 284,452 Property and equipment, net 1,158,964 7,493 375 1,166,832 Investments 156,691 – – 156,691 Assets restricted for the acquisition of property and equipment 4,444 – – 4,444 Pledges receivable 55,741 – – 55,741 Permanently restricted net assets 215,829 – – 215,829 Other assets 87,853 494 – 88,347 Total assets 3,349,462$ 30,892$ 1,370$ 3,381,724$

Consolidating Balance Sheet


45 1107-1272406



Liabilities and net assetsCurrent liabilities:

Accounts payable and other accrued liabilities 126,845$ 14,060$ 1,060$ 141,965$ Due to third-party payers 10,271 – – 10,271 Accrued payroll and related liabilities 182,962 1,939 43 184,944 Current maturities of long-term debt 32,975 – – 32,975

Total current liabilities 353,053 15,999 1,103 370,155

Long-term debt, less current maturities 1,204,136 – – 1,204,136

Accrued workers’ compensation and malpractice insuranceclaims, less current portion 61,809 – – 61,809

Other liabilities 47,138 812 1,109 49,059


Net assets (deficit):Unrestricted 1,244,766 14,081 (842) 1,258,005 Temporarily restricted 222,731 – – 222,731 Permanently restricted 215,829 – – 215,829

Total net assets (deficit) 1,683,326 14,081 (842) 1,696,565 Total liabilities and net assets (deficit) 3,349,462$ 30,892$ 1,370$ 3,381,724$

Consolidating Balance Sheet (continued)


46 1107-1272406


MedicalCenter Foundation Others Eliminations Consolidated


Net patient service revenues 2,392,506$ 49,256$ –$ –$ 2,441,762$ Premium revenues – 56,622 – – 56,622 Other operating revenues 115,225 6,929 40 (11,145) 111,049 Investment income associated with operations 3,758 15 43 – 3,816 Net assets released from restrictions 114,943 – – – 114,943

Total unrestricted revenues, gains and other support 2,626,432 112,822 83 (11,145) 2,728,192

Expenses:Salaries and related costs 1,214,013 32,665 1,318 – 1,247,996 Professional fees 23,167 75,125 – (11,145) 87,147 Materials, supplies and other 800,120 24,522 476 – 825,118 Interest 48,835 – – – 48,835 Depreciation and amortization 109,500 1,493 43 – 111,036 Provision for uncollectible accounts 219,404 5,169 – – 224,573

Total expenses 2,415,039 138,974 1,837 (11,145) 2,544,705 Operating income (loss) 211,393 (26,152) (1,754) – 183,487 Investment income associated with future operating and capital needs 88,505 – – – 88,505 Excess (deficit) of revenues over (under) expenses 299,898 (26,152) (1,754) – 271,992 Net assets released from restrictions used for the

purchase of property and equipment 787 – – – 787 Amortization of prior service costs and unrecognized losses 10,348 – – 10,348 Transfer (to) from affiliates (34,685) 32,228 2,457 – – Increase in unrestricted net assets 276,348$ 6,076$ 703$ –$ 283,127$

Consolidating Statement of Activities

Year Ended June 30, 2011(Dollar amounts expressed in thousands)

47 1107-1272406



Increase in unrestricted net assets 276,348$ 6,076$ 703$ 283,127$

Temporarily restricted net assets activityContributions and grants 115,811 – – 115,811 Investment income 9,781 – – 9,781 Net assets released from restrictions (115,730) – – (115,730) Increase in temporarily restricted net assets 9,862 – – 9,862

Permanently restricted net assets activityContributions 7,162 – – 7,162 Investment income added to corpus 57 – – 57 Increase in permanently restricted net assets 7,219 – – 7,219 Increase in net assets 293,429 6,076 703 300,208 Net assets (deficit) at beginning of year 1,683,326 14,081 (842) 1,696,565 Net assets (deficit) at end of year 1,976,755$ 20,157$ (139)$ 1,996,773$

Consolidating Statement of Activities (continued)


48 1107-1272406


MedicalCenter Foundation Others Eliminations Consolidated


Net patient service revenues 2,074,968$ 42,225$ –$ –$ 2,117,193$ Premium revenues – 58,108 – – 58,108 Other operating revenues 108,668 7,011 141 (10,419) 105,401 Investment results used in operations 63 24 – – 87 Net assets released from restrictions 107,859 – – – 107,859

Total unrestricted revenues, gains and other support 2,291,558 107,368 141 (10,419) 2,388,648

Expenses:Salaries and related costs 1,111,650 27,161 635 – 1,139,446 Professional fees 22,571 70,343 – (10,419) 82,495 Materials, supplies and other 686,058 21,927 391 – 708,376 Interest 46,694 – – – 46,694 Depreciation and amortization 96,186 1,487 22 – 97,695 Provision for uncollectible accounts 172,005 4,217 – – 176,222

Total expenses 2,135,164 125,135 1,048 (10,419) 2,250,928 Operating income (loss) 156,394 (17,767) (907) – 137,720 Investment income associated with future operating and capital needs 52,475 – – – 52,475 Excess (deficit) of revenues over (under) expenses 208,869 (17,767) (907) – 190,195 Net assets released from restrictions used for the

purchase of property and equipment 1,194 – – – 1,194 Amortization of prior service costs and unrecognized losses (34,275) – – – (34,275) Transfer (to) from affiliates (24,102) 22,315 1,787 – – Other – – 1,470 – 1,470 Increase in unrestricted net assets 151,686$ 4,548$ 2,350$ –$ 158,584$

Consolidating Statement of Activities


49 1107-1272406



Increase in unrestricted net assets 151,686$ 4,548$ 2,350$ 158,584$

Temporarily restricted net assets activityContributions and grants 101,046 – – 101,046 Investment income 8,790 – – 8,790 Net assets released from restrictions (109,053) – – (109,053) Increase in temporarily restricted net assets 783 – – 783

Permanently restricted net assets activityContributions 20,033 – – 20,033 Investment income added to corpus 54 – – 54 Increase in permanently restricted net assets 20,087 – – 20,087 Increase in net assets 172,556 4,548 2,350 179,454 Net assets (deficit) at beginning of year 1,510,770 9,533 (3,192) 1,517,111 Net assets (deficit) at end of year 1,683,326$ 14,081$ (842)$ 1,696,565$

Consolidating Statement of Activities (continued)


50 1107-1272406

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